Optimal capacity allocation in a vertical industry

Manel Antelo and Lluis Bru

MPRA Paper from University Library of Munich, Germany

Abstract: We examine how a social planner should allocate productive capacity in a downstream industry when, upstream, there is an efficient supplier and a set of less efficient suppliers of an essential input. We show that optimal allocation consists of setting a large quota and small quotas for the remaining capacity. This allows the planner, without necessarily harming consumers, to reap licensing rents above those that would be obtained in a competitive downstream market or under public management of capacity. We also discuss circumstances under which a use-or-lose requirement for the large quota is welfare enhancing or welfare reducing, and under which banning price discrimination in the intermediate market may be socially optimal.

Keywords: Capacity allocation; dominant firm; use-or-lose requirement; price discrimination; quota licence; soft-budget constraint (search for similar items in EconPapers)
JEL-codes: D43 F13 L13 (search for similar items in EconPapers)
Date: 2022-01
New Economics Papers: this item is included in nep-com, nep-mic and nep-reg
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Persistent link: https://EconPapers.repec.org/RePEc:pra:mprapa:113984

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